Samsung Electronics Comp., Ltd. (KSC:005930) continued its warpath in the smartphone market this week, announcing plans to buy approximately 3 percent of veteran Japanese display-maker Sharp Corp. (TYO:6753) for $110M USD. The deal, viewed as a bargain by analysts, relieves the cash-strapped Japanese firm and gives Samsung a tighter grip over the smartphone commodity component market, a sector where it was already a top player.

I. Samsung Joins Pack of Investors in Sharp Bailout

Sharp began seeking major investments late last year. Stressed by the burden of the continual investments necessary to keep pace with ever-evolving display technologies, Sharp was on the verge of bankruptcy. But banks pitched in hundreds of millions and system-on-a-chip maker Qualcomm, Inc. (QCOM) offered up $120M USD. Qualcomm's display subsidiary Pixtronix will be working with Sharp to develop next generation indium gallium zinc oxide (IGZO) display technology.

Now Samsung has joined that small pack of corporate investors.

Qualcomm and Samsung are creating new business by bailing out Japan's Sharp.
[Image Source: Reuters]

The deal with Mizuho Financial Group, Inc. (TYO:8411) and Mitsubishi UFJ Financial Group Inc. (TYO:8306) involved a promise by Sharp to mortgage its international facilities and lay off 10,000 employees to cut costs.

The deal sent Sharp shares soaring 14 percent on Wednesday.

Sharp, along with the other members of Japan's display-making "Big Three" (Sony Corp. (TYO:6758) and Panasonic Corp. (TYO:6752)), has been bleeding cash. Sharp shares are down 45 percent on the year (even considering the recent rise); the company bled ¥388B ($4.15B USD) in the past sixth months. Meanwhile Samsung has been churning record profits.

II. Ties to Apple, Hon Hai Weaken at Sharp

But Sharp remains an important provider of displays, both in the large (over 60 inch) and the small (Retina smartphone displays) categories. Notably, Sharp is a critical supplier to Samsung's arch-nemesis Apple. While Samsung's domestic rival LG Electronics, Inc. (KSC:066570) is the largest provider of iPhone Retina displays, Sharp is estimated to be the second largest.

Analysts speculate the purchase could result in Sharp small LCD stock being funneled to Samsung, which is hoping to sell and almost unfathomable 390 million smartphones this year. That could in turn hurt Apple's ability to stock screens for the iPhone 5, which reportedly is already suffering from shortages in the component chain.

Samsung also has the potential to invest deeper in Sharp, should the deal prove useful. With its bond status rated at junk, the company has limited options to raise cash -- stock is the most likely. Sharp will need ¥200B ($2.14B USD) to cover a bond which will be maturing in September of this year.

Sharp appears to be in danger of losing Hon Hai Precision Industry Comp. Ltd. (TPE:2317) ¥67B ($720M USD) investment. Hon Hai wanted to buy 9.9 percent of the company for that amount, but slumping share prices have likely deep-sixed the deal. The pair also had suffered from disagreements on how much control the Taiwanese Hon Hai -- who owns Apple's primary device assembler, Foxconn -- would have over its Japanese investment. Sharp is the rumored producer of the 60-inch LCD panel for the upcoming Apple LCD TV product, while Hon Hai is reportedly working with Apple on the assembly end.

Tetsuro Ii, chief executive officer of Commons AM, told Reuters that despite the fear of dilution, the investment is very valuable to both companies as it opens the door to technology trading. He comments, "Rather than the amount of investment, it is the partnership with Samsung that Sharp gains that is important. Sharp has an opportunity to use the Samsung platform."

The 'Apple aren't innovating' meme is powerfully attractive to some folks, it get's repeated a lot. What's it based on? One way to assess the pace of product innovation at Apple would be to to look at the history of Apple since 1997 (when essentially it morphed into Apple V3 under Jobs) and track the dates of major product innovations and calculate the average time between major product innovations and see if Apple is slowing down major production innovations. Luckily someone has just done that and it's here:

The article contains a nicely done info-graphic on the Apple product innovation timeline.

It turns out that when you strip out some of the less significant stuff and concentrate on the big product pillars then the average time between major product innovation is three years and ten months. By that math, Apple is due to announce a fifth major pillar of its business around this October. Doesn't mean that they will but it does mean that the gap since the iPad was introduced is not particularly long by Apple standards.

The actual timeline of major product pillars is as follows:

iMac

3 years 4 months later

iPod

5 years 3 months later

iPhone

3 years

iPad

Personally I think the notion that Apple has to come up with entirely new product or business lines in order to continue to grow is false or at least overblown. The tech markets tend to go through revolutionary tech mutations every once and while, the PC and the Internet were two such mutations, and the most recent mutation is now well under way which is the switch to networked mobile devices using a touch interface.

Apple is the only company from the PC era that has made the transition to the new mobile paradigm successfully and is one of only two companies making any profits in the new markets (the other is obviously Samsung).

Apple already has an installed user base of 500 million and will probably have a billion within a couple of years. All the data (and I do mean all) show unequivocally that iOS users are far more active users of iOS as a platform than Android users are of Android as a platform so that 500 million to a billion users means that iOS will be the most robust platform for a long time to come. Apple had to innovate to become the most successful mobile device player but it doesn't have to innovate in the same way to remain the biggest player. That doesn't mean it won't innovate or launch new product lines, but it doesn't have to remain the giant of the tech world.

Tony, "innovation" is not what you seem to think it is. Releasing a hit product is not innovation, just successful business.

What was innovative about the iMac? OSX was just another unix with a GUI. Consider it a refinement on NextStep + bsd. Having the monitor and cpu together was done more than a decade earlier.

The ipod was a prettier looking version of products from Creative and Archos and others. OTOH, the first nano and the gumstick shuffle were quite impressive for the minaturization factor, but that's an accomplishment in engineering/manufacturing.

Smart phones existed before the iphone. Again, just a successful implementation.

The iPad, unlike the others, created a market that barely existed before. They were the first to be successful at overcoming the problems the tablet presented. A triumph, no question, but at the heart of it you have a larger itouch/iphone. Another case of refinement on prior work...yet when others do it they suddenly get possessive about intellectual "property."

The iWatch, though potentially very useful to me if it results in a water proof gps sports watch that delivers music over bluetooth, will not be the same success, in part because smart phones like their's killed the main reason for wearing a watch.

quote: Tony, "innovation" is not what you seem to think it is. Releasing a hit product is not innovation, just successful business.

Incorrect statement. Hit products can either require innovation or not require innovation. Just like you can't prove that a product was innovative just because it was a hit, you can't state that it wasn't either.

quote: The ipod was a prettier looking version of products from Creative and Archos and others. OTOH, the first nano and the gumstick shuffle were quite impressive for the minaturization factor, but that's an accomplishment in engineering/manufacturing.

Oh right, that's just 'an engineering / manufacturing accomplishment'. I wonder what on earth you think is precisely the thing which needs innovation in order to achieve. Do you think having an idea is innovative? Or is it innovative to be able to engineer and manufacturer something unlike anyone else has done before .

quote: Smart phones existed before the iphone. Again, just a successful implementation.

Again, this is an unbelievably ridiculous statement. According to your logic, every single phone which came out after the first smartphone had and required absolutely zero innovation? Just take a step back and realise how plain stupid that is. The innovation that Apple offers is in optimising both the UI and the hardware, and that remains to this day. The iPhone 5, for example, is still to date the fastest phone in the thinnest package with the longest battery life. An unbelievable package. Yet you are somehow so deluded that you think it requires no innovation. I wonder how you justify that nobody else has been able to match or keep up with Apple on that front. Look at Samsung, the GPU in the American SG3 was slower than the 7 month older iPhone 4S.

quote: The iPad, unlike the others, created a market that barely existed before. They were the first to be successful at overcoming the problems the tablet presented. A triumph, no question, but at the heart of it you have a larger itouch/iphone. Another case of refinement on prior work...yet when others do it they suddenly get possessive about intellectual "property."

Again, it's unbelievably stupid to think that solving 'the problems' didn't require innovation. Again, I question if you know what innovation is, or are you so naive that you think engineering is just something which happens and doesn't involve any technology?

quote: If anything, Apple successes are a result of better implementation , rather than innovation. This has been proven by product history.

To repeat myself, better implementation REQUIRES innovation . If it didn't, everyone would be able to do it.